All most the same for other types of product groups,
future contract also applies as the same structure and purpose as we mentioned
above. The contractual partners can take long position or short position
depends on their strategies. However, futures or options are considered as
zero-sum game when profit of one people is the loss of the other ones.
Therefore before entering the futures contract, please taking into account
every detail and needed information of the market’s volatility.
versa, if you expect there is an increase of agricultural products during the
period of the future contract, then you could take short position and become a
seller who make commitment to deliver a certain amount of underlying assets at
a future date for a defined money that you agree upon today. Basically, seller
will be farmers. They are the ones who need to make sure that they can deliver
all of their products in short time for the next coming harvesting season.
you expect there is a reduction of the agricultural products during the period
of the future contract, then you could take long position and become a buyer who
make a commitment to purchase a certain amount of underlying asset at a future
date for a defined money that you agree upon today. Normally buyer will be
producer or investors. They are the ones who really need a stable amount of
products during the production process and do not want to take risk for the
price volatility in the future.
If you are closely taking notice, then you will
realize all of the agricultural products are traded under the forms on future
in CME. And of course, market makers who enter the contracts also have
sugar, cotton, etc.
cattle, feeder cattle, lean hog, etc.
Oilseeds: corn, wheat, soybean, oats, rice, etc.
when it comes to Agricultural Products, CME definitely
had become the pioneer in this area. According to the statistics, in 1961, CME
had first introduced its future contract on agricultural product which was the
frozen and stored belly pork meat. Since then, agricultural and farming
products have been continuously diversified and added to the trading lists such
Symmetric risk profiles when the
investor is free to choose the buyer/long position or seller/short position.
if you enter the futures contract, at the expired date:
As a buyer, you are committed to
buy a certain amount of assets.
As a seller, you are also
committed to sell or deliver a certain amount of asset to contractual partner
the other way round, both contractual partners have to fulfill their duties
Asymmetric risk profiles when
buyer and seller do not have the same risk profile due to their different
right and duties. “Premium” is the key point that makes the differences.
Ex: if you enter
an option contract, at the expired date:
option buyer (the one who pays premium on their contract) will have the right
to execute the transaction or not. That is the reason why option buyer has
limited loss potential.
option seller (the one who receives premium) will not have the right to
choose if they could deliver the contract or not. The decision making falls
into the hands of option buyer. That is the reason why the option seller has
an unlimited loss potential.
financial instruments which are derived from an underlying’s assets. Markets
participants do not need to hold tangible assets for trading.
And now, let’s see what are the similarities and
differences between futures and options:
As a financial manager of a producing company which is
heavily relied on petroleum in order to run the whole manufacturing system, if
you think that the oil price will go up in the near future due to some
reduction production program of OPEC (Organization of Petroleum Exporting Countries),
then you immediately decide to enter a future contract to buy a lot of barrels
of oil at a future date (the expiration date can be 3 months later on) for a
specific amount of money (which is identified on the contract date). According
to this contract, the firm’s purpose is to hedge against the oil price
appreciation and reduce the loss.
participants enter into an agreement to exchange a certain amount of products
at a future date for a specific amount of money.
instrument that is derived from the underlying asset’s value. In this situation,
the asset could be anything from bars of gold, tons of coffee, stock, bonds or
even interest rate. That is the reason why one more especial thing about
derivative instrument is that the player does not need to hold a real assets
such as real estate, stocks, bonds, foreign currency, agricultural product like
corn, coffee, rice, wheat, etc.
Firstly, both futures and options are identified as a
sub-element within derivative. Obviously, derivative is:
Therefore before going to detail of each products to
see how it works, our group will briefly introduce the definition of futures
and options and some explanations why CME is the world largest marketplace for
variety types of financial derivative instruments.
It is widely known that there are 4 main types of
product groups that are used to trade the most widely on the CME (Chicago
Mercantile Exchange) namely equity index, interest rate, FX and agricultural.
Specifically, all of those 4 main types of products are traded under the forms
of futures and options.